Answer:
a. Should the firm buy the new equipment?
- no, because operating profit will decrease
b. What is the minimum price the company would have to charge in order for the new equipment to be worth purchasing (assuming the higher or lower price doesn’t affect the 500,000 unit volume)?
Explanation:
contribution margin per unit = $0.50
total units sold = 300,000
fixed costs = $100,000
operating income = (300,000 x $0.50) - $100,000 = $50,000
if the firm improves the quality of their products:
contribution margin per unit = $0.40
total units sold = 500,000
fixed costs = $160,000
operating income = (500,000 x $0.40) - $160,000 = $40,000
if you want to keep operating income at $50,000 then minimum sales price should be:
500,000 = $210,000 / contribution margin
contribution margin = $210,000 / 500,000 = $0.42
sales price = contribution margin + variable costs = $0.42 + $0.60 = $1.02 per unit
